Thursday, March 12, 2015

Explaining External Debt

Yesterday, the media (social, online, offline) were agog at Malaysia’s external debt numbers. They shouldn’t have been – the inflated numbers were due to a redefinition of external debt made last year (see here, especially the last four pages), which was announced, though nobody appeared to have caught on.

So what’s the deal?

Hafiz Noor Shams has a nice graph showing the difference between the old definition and the new one. I agree with him, the reporting on this has been deplorable, and not just from the local media (sorry guys, it has been pretty bad), but from the foreign media as well. One joker speculated that with external debt so high, Malaysia might have trouble “servicing” it, because the foreign exchange reserve cover was low. Hah!

I just want to put all this in as simple a way as possible, to make all this easier to grasp:

Old definition: Any foreign currency denominated debts or claims.

New definition: Any debts or claims owned by foreigners, no matter in what currency.

The practical difference is this:

  1. Anything under the old definition is included under the new definition (i.e. all foreign currency debt)
  2. Any Ringgit denominated government or private sector debt owned by foreigners is also included
  3. Any Ringgit-denominated foreign claims on Malaysians or Malaysian owned entities is again also included
  4. Any lines of credit (foreign currency denominated) relating to trade is added on top

The English translation:

Item 2 means that if a foreign institution buys Ringgit denominated Malaysian government debt within Malaysia, that (domestic) debt is now classified as external debt.

Item 4 is probably the safest form of external debt ever – it’s basically short term bridge funding for trade payments. It’s very short term and fully collateralised. Think of it as a cheque with a bank guarantee.

Item 3 is something which throws most people for a loop. If I’m an expat working in Malaysia, my salary account is now considered Malaysia’s external debt. If I’m a foreign company operating in Malaysia, any and all deposits I have in the banking system (irrespective of currency denomination) is also considered Malaysia’s external debt.

A deposit is in essence a claim on a bank. When you deposit money in a bank account, you have effectively “loaned” the money to that bank. When that claim is by a foreigner, under the new definition, that deposit becomes “external” debt.

Even more – any Ringgit in any form held by a foreigner (whether in a bank account or not), is also Malaysia’s external debt. A tourist changing USD/Yen/Euros for Ringgit is de facto inflating Malaysia’s “external debt”.

Note here that, outside the items under the old definition, there are no potential calls on Bank Negara’s international reserves. The difference between the old and the new definition is really all Ringgit-denominated items. What the redefinition does is bring the external debt statistics more in line with the International Investment Position and Balance of Payments statistics, which includes all foreign claims and not just out and out foreign currency debt.

Apart from that, it’s no big deal. There hasn’t been a “tripling” of Malaysia’s external debt between 2014 and 2013. If you take the new definition backwards, the increase in 4Q14 over 4Q13 was a much more modest 8%, or more or less in line with Malaysia’s nominal GDP growth. In other words, nothing really happened.

Hey, can we redefine “storm in a teacup”?


  1. So, all along its just a play of words...

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  2. Who redefined it and why is a redefinition necessary now when economically we're in the doldrums? They could have chosen a less sensitive time to redefine "foreign debt" and
    Not caused this storm in a teacup

    1. @dukuhead

      The redefinition was made to make Malaysia's external debt statistics conform to international standards. It was also conducted this time last year. Nobody made a fuss back then.

      Who says we're in the doldrums? Apart from oil & gas, the rest of the economy looks just fine.

  3. Duku... Hisham already referenced to Hafiz Noor tats states to be in conformity with IMF definition.


  4. Cash may be King...But Perception is Queen.
    The Queen more often than not tells the King what to do!

  5. Hi Hisham, just wondering, wouuld you happen to know what definition Singapore uses, and, what is Singapore's debt position? Thanks so much.

    1. @The Slug

      S$1.7 trillion and they use the expanded definition.

      Data and explanation here (data near the end, and explanation in the footnotes):

    2. Woah... That is like more than double that of Malaysia's... So why isn't anybody making a fuss over it here..

    3. @The Slug

      Because Singapore is a financial centre, and financial centres all have high external "debt". In fact so would any country with a high degree of trade and financial openness

  6. Does it means that all the previous foreign debt comparisons of countries done by many, and highlights that malaysia is among the more balanced one were actually using inconsistent terminology, in a way comparing apples to oranges?

  7. This comment has been removed by the author.

  8. Thank you for the analysis. I was listening to a report by Kinibiz and felt it really didn't tell me anything. Luckily Facebook appended this article as a related post. Don't the stats typically report the ratio of exports to external debt too? I think that figure gives us a sense of how leveraged we are.

    1. @anon


      The typical ratios published are usually reserves to retained imports, and reserves to external debt and short term external debt. The last ratio is probably most important (currently about 1.1x).

      I don't think I've seen exports to external debt, though it might be a useful measure to track. In Malaysia's case, it's well in the safe zone - exports are huge relative to the economy.

    2. well, you know who's behind KiniBizz, Malaysiakini

  9. It should be considered as external liabilities, rather than external debt. This would ameliorate the confusion among the non-technical commentators

  10. PM of Malaysia in euphoria for receiving recognition by Dean of Wharton praising his leadership in raising national debt by 8 % during his tenure as Minister of Finance.
    Malaysians are proud of lowest undervaluation of RM in the last 6 years.
    Malaysia must be doing something right,in comparison with so many countries that Wharton considered an award based on such financial KPI 's.
    arjuna waspada
    changkat lobak.

    1. @anon12.06

      It might help your credibility more if you note who actually got the Dean's Medal.

      As for the Ringgit's depreciation, read this. The Ringgit's depreciation is around the global average. This is USD strength, not MYR weakness.

  11. This is all meh. Im worried about the various contingent liabilities racked up by the govt.

    1. @J

      You might want to read this (including the comments).

  12. Hi, I am a newcomer to this blog and sorry for being late to this debate. But I wanted to take Hisham's point further to ask why the redefined external debt does not net off portfolio assets owned by Malaysian nationals abroad? Most sell side research here in Singapore makes a big deal about BNM's allegedly 'weak Fx reserve adequacy' against external obligations. And MYR has been everyone's favorite short. But asides from terms of trade issues it has never ceased to amaze me that analysts have rarely focused on the asset side of Malaysia's BOP position.

    But even there BNM hasn't done itself any favors. The published IIP is infrequent and old. And frankly, very people understand what's really in the 'other flows' or the, very lumpy, errors and omissions.

    Many Singapore based analysts will tell you ...oh its Chinese money leaving Malaysia, or seeking asset protection elsewhere. But it just doesn't square with developments in the money supply aggregates (no sign of deposit flight) or asset price developments (doesn't really seem like resident money is being pulled out of the equity or property markets.) So I am struggling to understand how to frame BOP, external debt and reserve adequacy issues.

    Very nice blog, by the way. Regards, Andy

    1. @Andy

      Thanks Andy.

      Some partial answers to your questions:

      1. Internationally, external debt statistics are never netted off against external assets. This makes sense from a credit perspective, as high leverage is not desirable in itself, irrespective of the net position. For an example, see 1MDB.

      2. Because of the redefinition, much of that reserve "cover" is actually unnecesssary/understated. As of April, there's
      RM109b in FX deposits sitting in Malaysian banks, which are classified as short term "external" debt. These obviously entail no FX reserve implications, since they are already denominated in FX terms.

      3. The IIP published by BNM is in conformance with the IMF SDDS. If you want up to date numbers, try DOS. The latest 1Q15 numbers were just released.

      4. From the IIP publication technical notes:

      "Other Investment - Refers to investment other than direct and portfolio investment. It comprises of currency & deposits, loans associated with financial leases, trade credits & advances irrespective of the length of the repayment period and other accounts receivable/ payable."

      Given Malaysia's high exposure to trade (exports are around 70% of GDP), I'm not too surprised to see a high proportion of "other assets", which would reflect export receivables. You also have to factor in the high rate of investment overseas in the past decade and a half by Malaysian MNCs and investment institutions, which would include their overseas cash and deposits.


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